UK bank pay regulations now the toughest in the world – PwC responds to final Remuneration Codes

Published at 11:37 AM on 23 June 2015

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) published their final Remuneration Codes today.

Commenting on the final Codes, Jon Terry, partner and pay expert at PwC, said:

“As promised by the Government, the UK now has the toughest bank pay rules in the world. The biggest concern for banks headquartered in the UK is the uneven playing field that now exists between the UK and the rest of the EU, adding to the existing differences between the EU and the rest of the world.

"It's helpful that the PRA has avoided lengthening deferral for more junior material risk takers, caught by the extensive European rules. This limits the impact on UK banks' competitiveness overseas. However, the implications for UK banks’ competitiveness can’t be ignored. Although the PRA says they don't want this to happen, it is likely that British banks will need to pay a premium to attract senior executives outside the UK, and more in fixed pay than their foreign competitors.

“Regulators are hoping the rules will help re-build trust in the City, but experience suggests that structural pay changes have limited impact on behaviour. We would encourage Regulators to focus on creating a positive culture in which ethical behaviour is a result of employees’ intrinsic motivation as opposed to fear of negative consequences.

“There has already been a move to greater fixed pay and less variable pay over the last few years in response to regulation and we expect this to continue. This will lessen the proportion of pay linked to performance.

“The new Code is silent on the matter of key concern for the asset management industry and smaller banks: whether the bonus cap (and other structural rules, such as minimum levels of deferral) will apply to them. Those firms will have an unwelcome period of uncertainty while they wait for the final European Banking Authority Guidelines later in the year, and the UK regulator’s response, to find out if they’ll be caught by the regulation or not.”

2. PwC has recently released research with London Business School which shows that an approach to pay regulation that focuses too much on pay instruments, deferral and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely. For more information please see: http://www.pwc.co.uk/financial-services/financial-services-risk-and-regulation/why-you-can-scare-bankers-into-doing-the-right-thing.jhtml

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

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At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.